Tuesday, December 30, 2008

Power Sector: A bundle of opportunities lying ahead

Our outlook towards the Indian Power sector (the generation and transmission
companies) remains buoyant, and we believe that the sector is well positioned to grow
significantly. The ability to pass on the cost to the end user and generate fixed returns
makes the Indian Power sector a safe investment opportunity. In addition, the recent
bear run has put most of the power generation and transmission companies’ stocks
within an attractive price range, which provides potential capital appreciation
􀂃 Government looking to stimulate demand through infrastructure spending
Infrastructure spending has been the focal area of the Government of India (GoI) in
the past few years. With the Indian economy slowing down, the GoI is looking at
stimulating demand with increased infrastructure spending to achieve a GDP
growth rate of 6–6.5% over the next few years. Correspondingly, we expect the
Indian power sector to grow at 12–13% annually during the XIth five-year plan. A
capacity addition of more than 78,000 MW has been envisaged during the XIth fiveyear
plan by the GoI. The installed capacity has already increased from about
132,000 MW at the end of the Xth five-year plan to about 146,000 MW as in
October 2008.
􀂃 Current power deficit – a good opportunity for expansion
The excessive demand scenario for power in the country also implies significant
growth potential for the power sector. India has historically been a power-starved
country, with the peak power deficit standing at 16% in FY07-08. The GoI has
charted out its mission of ‘Power for All by 2012’, which calls for a YoY capacity
addition of 18,000–20,000 MW during the ongoing five-year plan. The mission also
targets an increase in the per capita consumption of electricity from 631 Kw/hr in
2006 to more than 1,000 Kw/hr by 2012.
􀂃 Long-term coal linkages to improve Plant Load Factor (PLFs) of power plants
The profitability of the power generating companies is expected to improve in the
coming quarters as the GoI is well on track to provide long-term fuel linkages to the
power plants. Coal India Ltd. (CIL), which mines about 85% of the coal produced in
the country, is expected to sign a fuel supply agreement (FSA) with certain PSUs,
with an assurance to supply coal for 90% PLF. In the current scenario of fuel
shortages, the power generating companies should benefit extensively from this
development. With reliable fuel linkages, the Peak Load Factor of the power plants
should improve and correspondingly result in better margins for the power
generating companies.
􀂃 Conducive regulatory environment
The assured returns structure enjoyed by the generation and transmission
companies, along with their strong balance sheet positions and GoI’s support,
should help these utility companies to grow appreciably and enhance the
shareholders’ value.

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